Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Question
Chapter 13, Problem 14P
a.
Summary Introduction
To determine: The alpha which the investors in DS’s fund expect to receive.
Introduction: Stock alpha is overabundance risk of the required return; it implies that it is controlled by subtracting the required return of the stock as per SML (security market line) from the expected return of the stock.
b.
Summary Introduction
To determine: The money DS has under the management.
c.
Summary Introduction
To determine: The money HDAM generates with fee income.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
Suppose a (very skilled) fund manager earns a safe return of .70% per trading day. There are 252 trading days per year.
(a) What will be your annualized holding period return on $100 invested in the fundif the manager allows you to reinvest in her fund the .70% you earn each day?
(b) What will be your annualized holding period return assuming the manager putsall of your daily earnings into a zero-interest-bearing checking account and paysyou everything earned at the end of the year?
Herb E. Vore is considering investing in a Salad Stop franchise that requiresan initial outlay of $100,000. He conducted market research and found thatafter-tax cash flows on this investment should be about $20,000 a year forthe next 7 years. The franchiser states that Herb will generate a 20 percentrate of return. Herb currently has his money in a mutual fund, which hasgrown at an average annual rate of 10 percent. He tells the franchiser thatmoney has a time value, and the actual rate of return according to his calculationsis much less than 20 percent.a. Do you agree with the franchiser or with Herb?b. What rate of return is the franchiser using, and what method did Salad Stopuse to calculate it?
c. What rate of return is Herb using, and what method did he use?d. Should Herb make the investment? Explain your answer.
Ash Ketchum has been hired as a financial advisor for Professor Oak. He has to invest $50,000 in a portfolio of two assets. One asset is a safe asset with a fixed return of 10%. The other asset is risky, it has a 35% expected rate of return, but the standard deviation of this return is 15%. Professor Oak wants as high a rate of return as possible while keeping the standard deviation at or below 7%. How much of Professor Oak's money should Ash invest in the safe asset?
Chapter 13 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 13.1 - If investors attempt to buy a stock with a...Ch. 13.1 - What is the consequence of investors exploiting...Ch. 13.2 - How can an uninformed or unskilled investor...Ch. 13.2 - Under what conditions will it be possible to earn...Ch. 13.3 - Do investors hold well-diversified portfolios?Ch. 13.3 - Why is the high trading volume observed in markets...Ch. 13.3 - What must be true about the behavior of small,...Ch. 13.4 - What are several systematic behavioral biases that...Ch. 13.4 - Prob. 2CCCh. 13.5 - Prob. 1CC
Ch. 13.5 - Prob. 2CCCh. 13.6 - Prob. 1CCCh. 13.6 - Prob. 2CCCh. 13.7 - Prob. 1CCCh. 13.7 - How can you use the Fama-French-Carhart factor...Ch. 13.8 - Which is the most popular method used by...Ch. 13.8 - Prob. 2CCCh. 13.8 - Prob. 3CCCh. 13 - Assume that all investors have the same...Ch. 13 - Assume that the CAPM is a good description of...Ch. 13 - Prob. 3PCh. 13 - Prob. 4PCh. 13 - Prob. 5PCh. 13 - Explain what the following sentence means: The...Ch. 13 - You are trading in a market in which you know...Ch. 13 - Prob. 8PCh. 13 - Your brother Joe is a surgeon who suffers badly...Ch. 13 - Prob. 11PCh. 13 - Suppose that all investors have the disposition...Ch. 13 - Prob. 14PCh. 13 - Prob. 15PCh. 13 - Prob. 16PCh. 13 - Prob. 17PCh. 13 - Prob. 18PCh. 13 - Each of the six firms in the table below is...Ch. 13 - Prob. 20PCh. 13 - In Problem 20, assume the risk-free rate is 3% and...Ch. 13 - Prob. 22PCh. 13 - Prob. 23PCh. 13 - Prob. 24PCh. 13 - Explain why if some investors are subject to...Ch. 13 - Prob. 26PCh. 13 - Prob. 27PCh. 13 - You are currently considering an investment in a...Ch. 13 - Prob. 29P
Knowledge Booster
Similar questions
- A woman has $216,000 to invest and wants to generate $12,000 per year in interest income. She can invest in two tax-free funds. The first is stable, but pays only 4.5%. The second pays 9.25%, but has a greater risk. If she wants to minimize the amount of money invested in the second fund, how much should she invest in the first fund?arrow_forwardAffleck Inc.'s business is booming, and it needs to raise more capital. The company purchases supplies on terms of 1/10, net 20, and it currently takes the discount. One way of acquiring the needed funds would be to forgo the discount, and the firm's owner believes she could delay payment to 40 days without adverse effects. What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.)arrow_forwardSuppose that you have $9,000 in a rather risky investment recommended by your financial advisor. During the first year, your investment decreases by 40% of its original value. During the second year, your investment at the end of year one increases by 50%. Your advisor tells you that there must have been a 10% an overall increase of your original $9,000 investment. Is your financial advisor using percentages properly? If not, what is your actual percent gain or loss of your original $9,000 investment?arrow_forward
- Mr.Andi is a manager at an automation company. As part of his future planning, Mr.Andi plan to manage an investment IDR 100 thousand in the first year and increase this amount is 10% annually. To solve this problem, you have to create a spreadsheet from the data provided to complete your calculations along with the cash flow. Based on the data given: (a) How long will Mr.Andi's account have value in the future of IDR 3,000,000 at a rate of return of 6% per annum? (b) If Mr.Andi counts up to the next 30 years, find the nominal amount in the next 10, 20, and 30 years that Mr. Andi will achieve. The calculation spreadsheet can describe the amount deposited annually.arrow_forwardA financial manager wants to invest $50,000 for a client by putting some of the money in a low-risk investment that earns 5% per year and some of the money in a high-risk investment that earns 14% per year. How much money should she invest at each interest rate to earn $5000 in interest per year?arrow_forwardGinny Trueblood is considering an investment which will cost her $120,000. The investment produces no cash flows for the first year. In the second year the cash inflow is $35,000. This inflow will increase to $55,000 and then $75,000 for the following two years before ceasing permanently. Ginny requires a 10 % rate of return and has a required payback period of three years. Should Ginny accept this project? Justify your response. What are the major drawbacks of the Payback method ? What other method would you recommend to use and why?arrow_forward
- Buccaneer, Inc., has determined that it needs $10,000,000 in cash per week. If Buccaneer needs additional cash, it can sell marketable securities, incurring a fee of $100 for each transaction. If Buccaneer leaves funds in its marketable securities, it expects to earn approximately 0.2% per week on their investment. Using the economic order quant ity model, how much cash should Buccaneer raise from selling securities each week to minimize its costs of cash?arrow_forwardA firm has only $10,000 to invest and must choose between two projects. Project A returns $12,400 after a year while project B pays $15,609 after three years. If management wants to earn 10 percent on an investment, which alternative should be selected based on the present value of the cash inflows?arrow_forwardYou invest in a mutual fund that charges a 4% front-end load, 2% total annual fees, and a 3% back-end load, which decreases 0.5% per year. How much will you pay in fees on a $10,700 investment that does not grow if you cash out after 3 years of no gain?arrow_forward
- As part of their investment strategy, the Carringtons have decided to put $100,000 into stock market investments and also into purchasing precious metals. The performance of the investments depends on the state of the economy in the next year. In an expanding economy, it is expected that their stock market investment will outperform their investment in precious metals, whereas an economic recession will have precisely the opposite effect. Suppose the following payoff matrix gives the expected percentage increase or decrease in the value of each investment for each state of the economy. Expanding Economic economy recession Stock market investment Commodity investment 20 10 -10 15 (a) Determine the optimal investment strategy for the Carringtons' investment of $100,000. (Round your answers to the nearest dollar.) stocks $ commodities $ (b) What profit can the Carringtons expect to make on their…arrow_forwardAs part of their investment strategy, the Carringtons have decided to put $100,000 into stock market investments and also into purchasing precious metals. The performance of the investments depends on the state of the economy in the next year. In an expanding economy, it is expected that their stock market investment will outperform their investment in precious metals, whereas an economic recession will have precisely the opposite effect. Suppose the following payoff matrix gives the expected percentage increase or decrease in the value of each investment for each state of the economy. Expanding Economic economy recession Stock market investment Commodity investment 30 5 -10 20 (a) Determine the optimal investment strategy for the Carringtons' investment of $100,000. (Round your answers to the nearest dollar.) stocks $ commodities $arrow_forwardSuppose she believes that the cash revenues from a new project will be $20,000 per year, assuming everything goes as expected. Cash costs (including taxes) will be $14,000 per year. She will wind down the project in eight years. The plant, property, and equipment will be worth $2,000 as salvage at that time. The project costs $30,000 to launch. She uses a 15 percent discount rate on new projects such as this one. Is this a good investment? If there are 1,000 shares of stock outstanding, what will be the effect on the price per share of taking this investment?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Pfin (with Mindtap, 1 Term Printed Access Card) (...FinanceISBN:9780357033609Author:Randall Billingsley, Lawrence J. Gitman, Michael D. JoehnkPublisher:Cengage Learning
Pfin (with Mindtap, 1 Term Printed Access Card) (...
Finance
ISBN:9780357033609
Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk
Publisher:Cengage Learning